Ch 4 - Solutions Self-Study Problems from Textbook

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Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Twelfth Canadian Edition SOLUTIONS – CHAPTER 4 BRIEF EXERCISE 4.16 Parfait Limited Statement of Changes in Shareholders’ Equity For the Year Ended December 31, 2020 Common Shares Retained Earnings Accumulated Other Comprehensive Income Total Beginning balance $600,000 $900,000 $250,000 $1,750,000 Comprehensive income Net income 1 50,000 50,000 Other comprehensive Income 60,000 60,000 Dividends _______ (300,000) _______ (300,000) Ending balance $600,000 $650,000 $310,000 $1,560,000 1 ($900,000 – $750,000 – $100,000).

Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Twelfth Canadian Edition BRIEF EXERCISE 4.18 Global Corporation Statement of Retained Earnings For the Year Ended December 31, 2020 Balance, January 1, as reported $1,038,000 Correction for overstatement of depreciation in 2017 (net of tax of $17,000) 40,000 Balance, January 1, as adjusted 1,078,000 Add: Net income 335,000 1,413,000 Less: Dividends 70,000 Balance, December 31 $1,343,000

Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Twelfth Canadian Edition EXERCISE 4.1 Reach Out Card Company Limited Statement of Comprehensive Income For the Year Ended December 31, 2020 Sales revenue $1,200,000 Cost of goods sold 750,000 Gross profit 450,000 Operating expenses Selling and administrative expenses 320,000 Income from operations 130,000 Gain on disposal of building 250,000 Net income 380,000 Other comprehensive income Items that will be reclassified subsequently to net income or loss: Unrealized gain on FV-OCI investments 18,000 Comprehensive income $398,000

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Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Twelfth Canadian Edition EXERCISE 4.3 a. 2020: Loss Jan. 1 to Sept. 30 (net of tax $700,000) $1,900,000 Loss Sept. 30 to Dec. 31 (net of tax $250,000) 700,000 Estimated impairment loss on net assets (net of tax $50,000) 150,000 Total loss from discontinued operations $2,750,000 b. Discontinued operations (2020): Loss from operation of discontinued subsidiary, net of tax $950,000 $2,600,000 Loss on impairment of net assets, net of tax $50,000 150,000 Loss from discontinued operations $2,750,000 c. The correction of the gain or loss on disposal of the subsidiary reported in 2020 should be reported in 2021 in the discontinued operations section of the income statement, net of tax and with separate EPS disclosure, supported by an explanation in a note to the financial statements. The correction would receive the same treatment as a change in estimate. d. Under IFRS, all assets and liabilities related to the discontinued subsidiary should be presented as held for sale, and classified as current assets and current liabilities, respectively.

Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Twelfth Canadian Edition EXERCISE 4.3 (CONTINUED) e. Under ASPE, the solution to parts a. through c. would remain the same, except that earnings per share calculations are not required under ASPE. On the Statement of Financial Position, the assets and liabilities relating to the discontinued subsidiary should be segregated according to their nature (e.g. current assets related to the discontinued subsidiary should be presented as current assets held for sale/related to discontinued operations, and noncurrent assets related to the discontinued subsidiary should be presented as noncurrent assets held for sale/related to discontinued operations).

Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Twelfth Canadian Edition EXERCISE 4.10 a. Gottlieb Corp. Statement of Financial Performance For the Year Ended December 31, 2020 Sales revenue $1,300,000 Cost of goods sold 780,000 Gross profit 520,000 Operating expenses Selling expenses $65,000 Administrative expenses 48,000 113,000 Income from operations 407,000 Other revenues and gains Dividend revenue 20,000 Interest income 7,000 27,000 434,000 Other expenses and losses Loss on inventory due to decline in net realizable value 80,000 Loss on disposal of equipment 35,000 Loss from expropriation 35,000 175,000 60,000 Income before income tax 259,000 Income tax expense 64,750 Net income 194,250 Other comprehensive income Items that will not be reclassified subsequently to net income or loss: Unrealized gain on FV-OCI investments (net of $10,500 1 income tax) 31,500 Comprehensive income $225,750 1 ($42,000 x 25%)

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Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Twelfth Canadian Edition EXERCISE 4.10 (CONTINUED) b. Gottlieb Corp. Excerpt from Statement of Changes in Equity For the Year Ended December 31, 2020 Retained earnings balance, January 1, as reported $ 980,000 Correction for overstatement of net income in prior period (depreciation error) (net of tax of $13,750 1 ) (41,250) Balance, January 1, as restated 938,750 Add: Net income 194,250 1,133,000 Less: Dividends declared 45,000 Retained earnings balance, December 31 $1,088,000 1 ($55,000 x 25%) c. Retained Earnings…………………. 41,250 Income Tax Payable ………………. 13,750 Accumulated Depreciation - Buildings………………………. 55,000 d. Under ASPE, other comprehensive income is not recognized. All investments designated as fair value through OCI (FV-OCI) under IFRS would be accounted for as fair value through net income (FV-NI) under ASPE as long as they trade in an active market. Under ASPE, the unrealized gain on FV-OCI investments of $42,000 would be included in net income for the year ended December 31, 2020. As well, all previously recognized unrealized gains/(losses) on the related investments would have been recorded in net income and closed to retained earnings in those prior years. This would result in a different balance in retained earnings at December 31, 2019.

Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Twelfth Canadian Edition EXERCISE 4.12 a. Multiple-Step Format P. Bride Company Income Statement For the Year Ended December 31, 2020 (In thousands, except earnings per share) Sales revenue $ 96,500 Cost of goods sold 60,570 Gross profit 35,930 Operating expenses Selling expenses Sales commission expense $ 7,980 Depreciation - sales equipment 6,480 Freight out 2,690 $ 17,150 Administrative expenses Officers’ salaries 4,900 Depreciation - office furniture and equipment 3,960 8,860 26,010 Income from operations 9,920 Other revenues and gains Rent revenue 17,230 27,150 Other expenses and losses Interest expense 1,860 Income before income tax 25,290 Income tax expense 9,070 Net income $16,220 Earnings per share $0.53 1 1 ($16,220 ÷ 30,550)

Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Twelfth Canadian Edition EXERCISE 4.12 (CONTINUED) b. Single-Step Format P. Bride Company Income Statement For the Year Ended December 31, 2020 (In thousands, except earnings per share) Revenues Sales revenue $ 96,500 Rent revenue 17,230 Total revenues 113,730 Expenses Cost of goods sold 60,570 Selling expenses 17,150 Administrative expenses 8,860 Interest expense 1,860 Total expenses 88,440 Income before income tax 25,290 Income tax expense 9,070 Net income $16,220 Earnings per share 1 $0.53 1 ($16,220 ÷ 30,550) c. An investor interested in information about operating vs. non- operating items would prefer the multiple-step format because income from operations is calculated before other revenues and gains are added and before other expenses and losses are subtracted, to arrive at net income. Both income statement formats show the same amount of income before income tax and net income. However, the single-step formats tend to be more straightforward, requiring no judgement in allocating revenues and expenses between operating and non-operating categories. Further, it does not imply priority of one revenue or expense item over another. The multiple-step format matches expenses with related revenue and tends to require more judgement.

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Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Twelfth Canadian Edition EXERCISE 4.13 Quality Fabrication Limited Income Statement For the Year Ended December 31, 2020 Sales revenue Sales revenue $1,120,000 Less: Sales returns and allowances $118,000 Sales discounts 40,000 158,000 Net sales revenue 962,000 Cost of goods sold 504,000 Gross profit 458,000 Operating expenses Selling expenses 160,000 Administrative expenses 80,000 290,000 Depreciation expense 50,000 Income from operations 168,000 Other revenues and gains Interest revenue 70,000 238,000 Other expenses and losses Interest expense 50,000 Loss from storm damage 124,000 Income before income tax 64,000 Income tax expense 1 16,000 Net income $ 48,000 Earnings per share 2 $0.32 1 ($64,000 x 25%) 2 ($48,000 ÷ 150,000)

Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Twelfth Canadian Edition EXERCISE 4.18 Net income: Income from continuing operations before tax $23,650,000 Income tax expense (30%) 7,095,000 Income from continuing operations 16,555,000 Discontinued operations Loss before tax $3,225,000 Less income tax recovery 967,500 2,257,500 Net income $14,297,500 Preferred dividend entitlement ($10,750,000 x 10%): $ 1,075,000 Weighted average common shares outstanding: 12/31/19–3/31/20 (3,600,000 x 3/12) 900,000 4/1/20–12/31/20 (4,000,000 x 9/12) 3,000,000 Weighted average 3,900,000 Earnings per share: Income from continuing operations $3.97 1 Discontinued operations (.58) 2 Net income $3.39 3 1 ($16,555,000 – $1,075,000) ÷ 3,900,000. 2 $2,257,500 ÷ 3,900,000. 3 ($14,297,500 – $1,075,000) ÷ 3,900,000.

Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Twelfth Canadian Edition *EXERCISE 4.19 a. Accrual Basis b. Cash Basis Service revenue Expenses Operating expenses Salaries & wages expense Insurance expense Income before income tax Income tax expense Net income $172,000 81,000 64,000 2,000 147,000 25,000 9,000 $16,000 $154,000 77,500 61,500 4,000 143,000 11,000 - $11,000 c. The accrual basis of accounting provides more useful information for decision makers because it recognizes revenue when the services are performed and expenses when incurred. This provides a better measurement of performance because it records what has happened regardless of the movement of cash. This also enhances the predictive ability of the income statement.

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Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Twelfth Canadian Edition PROBLEM 4.14 The deficiencies of the Amos Corporation income statement are as follows: a. 1. The heading is inappropriate. The heading should include the period of time for which the income statement is presented. 2. The unrealized holding gain on FV-OCI investments should be shown after net income as part of other comprehensive income, on a net of tax basis. The unrealized holding gain on FV-OCI equity investments will not be reclassified subsequently to net income or loss. 3. Cost of goods sold is usually listed as the first expense, followed by selling, administrative, and other expenses. 4. Advertising expense is a selling expense and should usually be classified as such. 5. Loss on inventory due to decline in NRV might be classified as an unusual item and separately disclosed if it is unusual or infrequent, and material. 6. Loss on discontinued operations requires a separate classification after income from continuing operations and is shown net of tax. 7. Intraperiod income tax allocation is required to relate income tax expense to income from continuing operations and loss on discontinued operations. 8. Under IFRS, earnings per share data is a required presentation for income from continuing operations, loss from discontinued operations and net income.

Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Twelfth Canadian Edition PROBLEM 4.14 (CONTINUED) b. Amos Corporation Statement of Comprehensive Income For the Year Ended December 31, 2020 Revenues Sales revenue $850,000 Dividend revenue 32,300 Gain on recovery of earthquake loss 27,300 Total revenues 909,600 Expenses Cost of goods sold 510,000 Selling expenses 1 113,800 Administrative expenses 73,400 Loss on inventory due to decline in NRV 34,000 Total expenses 731,200 Income from continuing operations before income tax 178,400 Income tax expense 2 44,600 Income from continuing operations 133,800 Discontinued operations Loss from operations, (net of income tax recovery of $12,150 3 ) 36,450 Net income 97,350 Other comprehensive income Items that will not be reclassified subsequently to net income or loss: Unrealized holding gain, (net of tax of $1,250 4 ) 3,750 Comprehensive income $101,100 Earnings per share: Income from continuing operations 5 $1.34 Discontinued operations 6 (0.36) Net income 7 $0.98 1 ($100,100 + $13,700) 2 ($178,400 X 25%) 3 ($48,600 X 25%) 4 ($5,000 X 25%) 5 $133,800 ÷ 100,000 shares 6 ($36,450) ÷ 100,000 shares 7 $97,350 ÷ 100,000 shares (rounded to show correct add down)

Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Twelfth Canadian Edition *PROBLEM 4.17 a. Razorback Sales and Service Income Statement For the Month Ended January 31, 2020 Cash Basis Accrual Basis Sales revenue $75,000 $105,750 1 Expenses Cost of computers & printers: Purchased and paid 89,250 2 Sold 63,750 3 Salaries and wages 9,600 12,600 Rent 6,000 2,000 Other Expenses 8,400 10,400 Total expenses 113,250 88,750 Net income (loss) $(38,250) $17,000 1 ($2,550 X 30) + ($4,500 X 4) + ($750 X 15) 2 ($1,500 X 40) + ($3,000 X 6) + ($450 X 25) 3 ($1,500 X 30) + ($3,000 X 4) + ($450 X 15)

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Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Twelfth Canadian Edition *PROBLEM 4.17 (CONTINUED) b. Razorback Sales and Service Statement of Financial Position As of January 31, 2020 Cash Basis Accrual Basis Assets Cash 1 $51,750 $ 51,750 Accounts Receivable 30,750 Inventory 2 25,500 Prepaid rent ______ 4,000 Total assets $51,750 $112,000 Liabilities and Owners’ Equity Accounts payable $ 2,000 Salaries and wages payable 3,000 Owners’ equity $51,750 3 107,000 4 Total liabilities and owners’ equity $51,750 $112,000 1 Original investment $ 90,000 Cash sales revenue 75,000 Cash purchases (89,250) Rent paid (6,000) Salaries and wages paid (9,600) Other expenses (8,400) Cash balance Jan. 31 $ 51,750 2 (10 X $1,500) + (2 X $3,000) + (10 X $450). 3 Initial investment minus net loss: $90,000 – $38,250. 4 Initial investment plus net income: $90,000 + $17,000.

Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Twelfth Canadian Edition * PROBLEM 4.17 (CONTINUED) c. 1. The $30,750 in receivables from customers is an asset and a future cash flow resulting from sales revenue that is ignored. The cash basis understates the amount of sales revenue and inflow of assets in January from the sale of computers and printers by $30,750. 2. The cost of computers and printers sold in January is overstated by $25,500. The unsold computers and printers are an asset of $25,500 in the form of inventory. 3. The cash basis ignores $3,000 of the salaries that have been earned by the employees in January and will be paid in February. 4. Rent expense on the cash basis is overstated by $4,000. This prepayment is an asset in the form of two months’ future right to the use of office, showroom, and repair space and should appear on the Statement of Financial Position. 5. Other operating expenses on the cash basis are understated by $2,000 as is the liability for the unpaid portion of these expenses.